Worst tax ever

Economics Economics Questions
1

Someone in another forum proposed to me the worst tax idea ever.

They proposed a tax on businesses where their tax rate would be a percentage of their revenues. Each business’s tax-rate would be equal to their profit-margin times their expenses. So, firms with high profit margins and high spending would pay more tax than firms with low profit margins and low spending. In other words, it’s a progressive tax on productivity with a complete exemption on taxing consumption.

I know that you all hate taxes, even the fairtax. But if you were to be asked which tax you think is least undesirable and which is most undesirable, what would your answer be?

Until now, I would’ve thought that tariffs were the worst, but a “progressive tax on business productivity” takes the cake. I’d say that the taiff comes in second, then, followed by the corporate tax.

As for my favorite tax, I lean towards progressive income taxation, but I acknowledge its drawbacks and the efficiency of consumption taxation. While you all think taxation should be abolished, I believe the best way to mitigate the distributional impacts of taxation is through diversity in the means of taxation. Since even consumption taxes favor production over consumption (and consumption is just as much a part of the production process), only through some ambiguous diversity of taxation could taxes be truly “temporally neutral.”

2

This brings to mind a debate I had in high school (so ages ago…) with our philosophy teacher. I argued (my mental processes are quite simply) “if, according to the law, we are equal why progressive taxation? Shouldn’t everyone pay the same “flat” tariff? 10%? 20% 30%? Why higher wage earners are to be punished?” The reply didn’t convince me one bit but it made me perfectly aware of the ideological basis of progressive taxation “From everyone according to his means, to everyone according to his needs”. Karl Marx is alive and well in the school system.

Moreover during recent years I became convinced that progressive taxation is really a mean to punish middle-class wage earners and investors, the “salt of the earth”. Marx’s ferocious hatred of the “bourgeoise” is still alive and well: lower brackets will always see progressive taxation as a struggle towards “equality” while top brackets usually don’t care. They are either so wealthy that they do not care how much they pay or they can easily relocate to lower-taxation havens. In Europe the phenomenon is particulary felt, with many billionaires relocating to England and Switzerland and many businesses moving to Slovakia, Ireland and other tax haven.

Middle-class wage earners usually cannot move around that freely or find such “easy” ways to reduce taxation so are particulary easy targets for a rapacious State.

3

Here’s a chart the person made of their proposal:

See what I mean?

Kakugo, quality-of-life is determined by consumption. Reduction in savings for people, for instance, only reduces their quality of life because they can’t consume later in life, such as when they retire.

And a tax which is progressive according to the marginal propensity to consume would have no impact on anyone’s spending habits. In this regard, it wouldn’t impact their lives at all, except for their ability to save, which the poor and middle-class tend to do very little of.

So, it depends on how progressive it is. If it’s more progressive than the MPC, you’re right, it makes it almost impossible for a person to move from the second to the third or fourth quartile. On the other hand, if it’s a flat tax, people who are hard workers can advance much more quickly, but the quality of life of low and middle income workers is reduced, as they aren’t able to have the same amount of disposable income each month. Their lack of disposable income may also make it difficult to pay for education, which is the key to higher earnings.

Furthermore, the progressive tax is favored because it acts as an automatic stabilizer in the business-cycle. With a progressive tax, the government doesn’t need to raise or lower taxes to address rising and falling aggregate demand, but can just let the progressive tax work its magic.

4

To name the worst tax ever, I must say, that it has to be inflation. In a way this too is a progressive tax making its biggest effect on the poor with steady income. Another thing it does is of course the instability in the business-cycle. As noted abov, to encounter that the progressive income tax on workers gets implemented. But perhaps the worst thing about inflation is that it’s almost entirely out of the control of the public and is seen as something that just is around and can’t be gotten rid of.

About the progressive income tax on companies. Isn’t that actually opposite to the one put on individuals? I mean it supports engagement in sectors with low profit-margins and therefore causes over-production there. This seems very similar to the malinvestments caused by inflation in the business-cycle. On the other hand it would provide some more stability to the economy by eliminating the most adventures industries with high risks, but then again wouldn’t that start to hamper innovation and progress alltogether? It just seems to be another thing that gives an edge to multi-million companies that can bear the risks of mixed activities more easily.

5

Exactly how does inflation generate revenue?

And if an inflation is a tax, what does that make deflation? Free money?

The business tax he proposes is progressive up to the point of businesses that make 50% net profit or less. It’s regressive from that point onward.

I don’t think very many (if any) businesses make more than 50% net profit. So, it’s basically just a progressive business tax. And yes, that means it would prevent smaller businesses from growing, which is what makes it so ridiculously stupid.

6

Since it takes time for the new money to spread around the economy it gives an advantage to those who get it first. The burst of fresh money changes the relative amounts held by different individuals. As the prices change thanks to the inflates supply of money the ones whos relative share increases get an advantage on the expense of those whose share decreases. The ones closer to the fresh money get to know of the bigger supply earlier and can adjust their prices/wages faster than the ones further away.

At least, that’s the way I’ve understood the business cycle, if I’m a bit incorrect somewhere please do correct me.

Deflation, if infact caused by decreasing the money supply, could easily be called a tax return (not sure about the term in englsih). But that of course would require that the money leaves the economy in the same order it came in.

7

I would just add that what makes inflation a tax is that it is the government who are the first holders of the new money. The benefactors of this new money get to consume wealth that they did not create which implies that someone else will have to consume less. It is a transfer of wealth away from real wealth creators to the holders of the new money.i.e. It is, in effect, a tax.

8

Taxation is theft. Is there a thing as “good” theft? I don’t think I ever heard of one. There is no such thing as a “good” disease, either. Some kill, some don’t, but I see no “good” in sniffles only because the sniffels don’t kill me.

9

If they spend it on tangible assets, which banks usually don’t, then yes.

If they don’t, then the real return on investment of inflated money is not higher, no matter when they get it, because any return would be in inflated dollars. If inflation is high, banks would have to invest the money heavily in high risk, high return projects, just to keep up with inflation. Most of their investments would fail, leading to more of them losing money than gaining.

Meanwhile, banks themselves are hurt because:

-Their reserve ratios become worthless

-Debts owed to them drop in value

-People stop borrowing

-People stop depositing money and even withdraw all of their money, out of fear of bank runs

For all of these reasons, banks do not profit from inflation. Another thing to consider is rational expectations. If people expect that government expansion of the money supply is going to cause inflation, they will pull their money out of banks and put it into tangible assets, like gold, thus effectively destroying money equal to the amount of money created.

And then there’s the fact that no actual “physical” money is necessarily created. The Fed funds itself based on the buying and selling of securities. It buys and sells securities it already owns, not securities it creates out of thin-air. And banks, the federal reserve, and people themselves will only purchase treasury securities if they have some confidence that the government’s monetary system isn’t going to collapse or be unstable.

On the contrary, banks because they are financial institutions that derive their income from savings and loaning, benefit far more from financial stability.

They’re called “open market operations” because we know what the Fed does and when. Every week, they meet and give us a report, and congress has oversight. The chairman of the Fed is required to disclose all of his investments, to make sure he isn’t engaging in any insider trading.

10

I prefer to look at the question in terms of what effect each tax method has on liberty. Historically, if you didn’t pay an excise tax the authorities would usually seize your goods. And If you didn’t pay a property tax they would take your property. But with an income tax the only thing the tax police can seize is your person. So I think the income tax, whether progressive or not, is the worst form of tax. Import tariffs are probably the least intrusive since only a small number of people ever have to deal with the tax police.

11

Take into account the tariff’s effect on prices and unemployment. You say that “tariffs are probably the least intrusive” but then the Smoot-Hawley Act was a contributor to the Great Depression, which affected everyone.

12

Let’s not forget that banks have repeatedly been in trouble and government has always come to their rescue with different measures. There are also many points in legislations that give banks an upper-hand in comparison to other industries and this is where their profit begins. What the’ve learned is that today they do not loan-out to maximum just to keep some kind of a buffer in order if something happens. Yet once in a while they run into trouble.

13

Yes, destructive economic effects can be traced to every type of tax. But my point was they don’t need to put ordinary people in jail to enforce an import tariff, whereas income taxes cannot be enforced any other way.

14

Banks face more restrictions on them that help savers and borrowers.

They aren’t subsidized, protected from competition, or deregulated. And before you mention FDIC, banks by law must pay fa premium or it.

15

I think you have that backwards. During inflation people will want to borrow more since they will be paying back less real value than they are borrowing. Your next point that people stop saving (ie. lending to the bank) reflects this.

16

Certain forms of tax are more destructive than others. I’d rather that income tax dodgers be put in jail than everyone in America be substantially poor due to tariffs.

17

It’s not really a premium though because it isn’t set by the market. It’s a rate set by the government for a service to be determined by the government. In other words, it’s a tax.

18

I don’t agree that an import tariff is necessarily more destructive to the economy than the income tax. I think the rates have more to do with economic harm than the type of tax. I think the more important issue is that in order to enforce any tax you first have to create a state with that capability. An import tariff just requires a relatively few customs officials. The income tax requires a vast bureaucracy capable of tracking down every form of income for every inhabitant.

19

For one thing, the government does all in it’s power to disguise the true extent of inflation. By discontinuing certain measures of money supply growth, by creating bogus measures of “overall price levels”, by excluding as many things as they can that would push up these figures, they hide from all but the most astute observers the true extent of inflation.

For another money is created “out of thin air” when the government issues t-bonds.

Whether or not banks profit from inflation is neither here nor there really, is it? We are talking about whether inflation works like a tax. We only need to demonstrate that the government benefits to make our case.

20

  1. Inflation

  2. Property taxes

Probably the two worst. But most are very bad. Let’s rephrase the original topic. What would be the LEAST destructive tax

I would go with a flat income tax, based on earned income only. Pick your percentage rate. It would be the same tax rate from $1.00 to $1 Trillion. No deductions. No credits. No exemptions.